What Is a Fixed Annuity? Why One Size Doesn’t Fit All
Some people try strawberry ice cream as a child and don’t like it. They then decide they don’t like ice cream at all. But what about chocolate, vanilla, or birthday cake flavor? Judging all ice cream by one type can lead to missed opportunities.
The same thing happens with annuities. Many consumers hear one story or try one type of annuity and form a negative opinion. But not all annuities are the same. In fact, fixed annuities can be tailored to fit a wide variety of retirement needs.
What Is a Fixed Annuity?
A fixed annuity is a financial product that guarantees* interest over a set time in return for premiums paid in, often between 1 and 10 years. This can help with income planning for retirement.
Some fixed annuities are simple. Others include extra features, called riders, to provide additional benefits usually for a fee.
Common Fixed Annuity Features
- Guaranteed* interest rate
- Deferred taxes on gains
- Penalty-free withdrawals up to a set amount
- Riders for income, long-term care, or death benefits (usually for a fee)
How Riders Add Flexibility
Riders can help customize a basic annuity for unique financial goals. Examples include:
Guaranteed* lifetime income
Payments that continue for the life of the annuitant or spouse
Long-term care riders
Extra funds for nursing homes, rehabilitation, or in-home care for qualifying health conditions
Death benefit riders
Money passes to a beneficiary, sometimes with added value if taken over time
Liquidity options
Withdrawals of 5% to 10% per year without penalty, depending on the contract
Tax Benefits to Consider
Fixed annuities allow money to grow tax-deferred. That means taxes on the interest earned are postponed until the money is taken out.
This deferment can help in two ways:
- Lower taxes at retirement – Many retirees earn less income, possibly reducing the tax rate on annuity withdrawals.
- Reduced tax on Social Security1 – Interest from other accounts (like CDs) may count toward the income amount used to tax Social Security benefits. Fixed annuities defer interest, which may help lower the tax owed.
Social Security tax thresholds**
- If your combined income is under $25,000 (single) or $32,000 (joint filing), there is no tax on your Social Security benefits.
- For combined income between $25,000 and $34,000 (single) or $32,000 and $44,000 (joint filing), up to 50% of benefits can be taxed.
- With combined income above $34,000 (single) or above $44,000 (joint filing), up to 85% of benefits can be taxed.
By using a fixed annuity instead of a traditional interest-earning account, some retirees may reduce the taxes they pay on their Social Security benefits.
- Tip: Always consult a tax advisor to understand how a fixed annuity may impact your specific situation.
What About Fixed Indexed Annuities?
Some fixed annuities use an external index, like the S&P 500®, to calculate interest. These are called fixed indexed annuities.
They offer:
- Potential for higher returns – Interest is linked to an index’s performance; however.
- No risk of market loss – Funds are not invested directly in the stock market.
Even though returns vary, the principal is protected. This option blends growth potential with protection.
Fixed and fixed indexed annuities come in many forms. Some are basic. Others offer add-ons that fit specific retirement goals. Before planning, explore your options with a licensed financial professional.
There may be more to annuities than you think, just like there’s more than one flavor of ice cream.
Looking for more retirement certainty? An annuity may help.
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1 https://www.kiplinger.com/retirement/social-security/604321/taxes-on-social-security-benefits
* Guarantees rely on the financial strength and claims-paying ability of the issuing insurer.
** Annuities are not endorsed by, and (company name) is not affiliated with nor approved by the Social Security Administration. The information contained here is for information only and is not intended to be individual financial advice. See your financial professionals to find out how annuities might work in your retirement income planning.